Insight into interest-rate swaps and steps to identify potential problems

On 28 May, the Netherlands Authority for the Financial Markets (AFM) published the results of an investigation into interest-rate swaps. Its report states how many interest-rate swap contracts have been concluded in the Netherlands by SMEs that are not classified as professional clients for the purposes of the Financial Supervision Act (Wft). It also describes when the swap contract may be a problem for such SMEs and when it is not a problem. Our website provides further information on this topic.

Having given insight into the scale and nature of the problem, AFM now wants more clarity on how many individual cases there may have been of inappropriate advice and/or negligence. More insight is also needed, AFM says, into the distress situations at specific SMEs with an interest-rate swap that is not (or is no longer) suited to their circumstances.

When may SMEs be at risk of immediate financial problems?

Late last year, ABN AMRO analysed its portfolio of around 6,000 interest-rate swap contracts with non-professional SMEs. This analysis helped us identify which clients may be at risk, and require extra attention.

Companies that are serviced by our Financial Restructuring & Recovery department may be at risk if the deal specifics of their interest-rate swap contract need to be changed. Their situation is not so different from that of other ‘FR&R’ clients with a fixed-interest loan that need to change the deal specifics of their loan contract. Another situation that may pose a risk is when the interest-rate swap no longer matches the interest rate risk that it is supposed to hedge. An overhedge like this could, for instance, be the result of the company not using its entire credit line.

Working with clients at risk

With our FR&R clients we look at various options to minimise any potential risk. This is standard practice at ABN AMRO, and takes place on an ongoing basis. For companies with a mismatch, a special procedure has been developed. As a part of the procedure, these clients will be approached in 2014 to discuss the risks and possible solutions.

The right service for the client

To determine whether in individual cases the bank may have given inappropriate advice or been negligent, ABN AMRO will be subjecting its portfolio to additional analysis. For groups that are at risk, the analysis will be completed this year. Other clients are scheduled to be scanned in the first half of 2015. If issues are identified, ABN AMRO will approach the clients involved and discuss possible solutions with them.

Clients who have questions about their interest-rate swap contract can contact their account manager. We are more than happy to discuss this matter with them.

Further information

If you are interested in learning more about what an interest-swap is and how it works, or about our advising regarding interest-rate swaps and potential risk situations, you can find the information on this website. AFM also provides further information on its website. AFM and ABN AMRO have frequent consultations in which we provide updates on progress with steps to identify potential problems.